MARKET WATCH: Oil prices rally on hopeful indicators

Energy prices continued to rally Feb. 9 in the New York market as the US dollar weakened against the euro and European Union officials mulled a possible rescue of financially troubled Greece and other countries with large sovereign debt.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Feb. 10 -- Energy prices continued to rally Feb. 9 in the New York market as the US dollar weakened against the euro and European Union officials mulled a possible rescue of financially troubled Greece and other countries with large sovereign debt.

“Crude rose 3% yesterday after the dollar's largest drop against the euro since November, as expectations heightened that the EU is willing to bailout beleaguered Greece. The rumors out of Brussels also took the broader market and energy stocks along for the ride, with the Dow Jones Industrial Average and the Oil Service Index each up 2%,” said analysts in the Houston office of Raymond James & Associates Inc.

However, natural gas prices dropped 2% “despite the winter storms, as traders emphasized that the colder weather isn't enough to keep a floor under prices in the face of near-record storage levels,” Raymond James reported.

Vanessa Rossi and Rodrigo Delgado Aguilera, international economists at Chatham House, home of the Royal Institute of International Affairs in London, said, “Greece currently faces a crisis on two fronts: There has been a long-run build-up of public sector debt due to persistently high budget deficits, and a very rapid build up of excessive external debt due to several years of massive current account deficits. Greece has been living beyond its means and must immediately cut spending and imports to check its unsustainable deficits.”

Whether Greece adopts austerity measures or has austerity imposed by financial market turmoil, they said, “There is little option but to cut the twin deficits rapidly, implying a steep recession and drop in imports.” They added, “The most drastic solution—abandoning the euro as a prelude to devaluation—would not change the requirement to cut the twin deficits since short-term export competitiveness is not the key issue and opportunities to boost exports (including tourism) are quite limited, especially as the European economy remains weak.”

Meanwhile, energy prices fell in early trading Feb. 10 as the dollar strengthened after Federal Reserve Chairman Ben Bernanke said the Fed will likely raise interest rates to tighten credit. Speaking to a House committee, Bernanke said the Fed is still months away from raising record-low interest rates that support the financial recovery of the US.

In other news, the American Petroleum Institute reported a 7.2 million bbl jump in US crude inventories in the week ended Feb. 5, along with a 1.6 million bbl increase in gasoline stocks and a 1.5 million bbl drop in distillate inventories. With Washington, DC, snowed in, government officials postponed the release of six oil and natural gas reports until later in the week, including both the weekly petroleum inventory and natural gas storage reports.

OPEC outlook
The Organization of Petroleum Exporting Countries reported the average price of its basket of 12 reference crudes hit a 15-month high of $80.29/bbl in early January, driven by cold weather. However, that trend reversed after temperatures rose in the Northern Hemisphere, combined with the stronger dollar and a downward correction in equity markets. The basket fell steadily to $71.01/bbl Jan. 29. Renewed concerns about economic growth, particularly in the eurozone, resulted in a further decline, pushing the basket below $70/bbl in early February. It was at $69.76/bbl Feb. 9, up 90¢ for the day.

OPEC said the world economy continues to improve, with global gross domestic product now expected to grow at “an upwardly revised” 3.4% in 2010 after contracting 0.9% in 2009. “The main contribution for this growth is coming from developing Asia, with China seen growing by 9.1% in 2010, while India is forecast to grow by 7% in 2010,” said OPEC officials. “The Organization for Economic Cooperation and Development in comparison is forecast to grow on a much lower level of 1.7%. The US is now expected to contribute the most within the OECD at 2.5% in 2010. Growth in 2010 continues to be challenged by concerns about the level of public debt in almost all OECD regions, still record high unemployment levels across the globe, and government efforts in China to prevent the economy from overheating.”

They said world oil demand growth in 2009 remained broadly unchanged at a contraction of 1.4 million b/d. For 2010, global demand is projected to grow by 800,000 b/d, in line with the previous forecast. “The slower pace of recovery in US demand, despite positive economic signals, is a key uncertainty for oil demand growth this year,” officials said. “Non-OECD regions will be the sole contributors to global demand growth in 2010.”

They project non-OPEC production increased 600,000 b/d in 2009 following a slight downward revision. In 2010, non-OPEC oil supply is forecast to increase by 300,000 b/d following a minor downward adjustment. In January, total OPEC crude production averaged 29.19 million b/d, according to secondary sources, representing an increase of 63,000 b/d from the previous month.

In 2010, the demand for OPEC crude is expected to average 28.8 million b/d, about 150,000 b/d above the previous assessment and almost unchanged from a year earlier.

Energy prices
The March contract for benchmark US light, sweet crudes gained $1.86 to $73.75/bbl Feb. 9 on the New York Mercantile Exchange. The April contract advanced $1.91 to $74.20/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.86 to $73.75/bbl. Heating oil for March delivery climbed 5.18¢ to $1.94/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.5¢ to $1.93/gal.

The March natural gas contract dropped 11.1¢ to $5.29/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 19.5¢ to $5.53/MMbtu.

In London, the March IPE contract for North Sea Brent crude gained $2.02 to $72.13/bbl. Gas oil for February was up $5.25 to $572.50/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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